EU directive is credit positive for Spanish, Italian, French and German covered bonds – Moody’s

Written by Michael Griffiths

28/06/2022

The new EU covered bond directive and associated amendments to national laws will strengthen credit standards for Spanish, Italian, French and German covered bonds, Moody’s has stated.

Amendments to the national laws will be effective from 8 July 2022.

Moody’s Investors Service has republished its covered bond legal framework reports for Spain, Italy, France and Germany. These are the first reports that Moody’s has updated to reflect changes to national laws driven by the EU covered bond directive.

At the same time, Moody’s has substantially updated the format of its legal framework reports and revised its scoring categories.

In Spain, the new law includes provisions that will better segregate assets for covered bondholders, reinforce supervisory powers, enhance governance of the pool of loans backing covered bonds, improve liquidity and preserve cover pool quality.

The amendments to the Italian covered bond law are broadly credit positive for covered bonds, Moody’s added, as new provisions enhance supervisory standards, introduce minimum credit quality requirements for swap counter parties and require issuers to hold 180 days’ liquidity for interest and hard bullet principal payments.

In France, the new provisions, which maintain the key strengths of the old French law, are also broadly credit positive. The new law particularly perpetuates the old law’s strict asset eligibility criteria and incorporates minimum credit quality standards for derivatives counter parties in line with the Capital Requirements Regulation.

Moody’s also said the amendments to the German covered bond law add clarifications and stronger protections for investors. Key positive features include a statutory power for the cover pool administrator to extend maturities, a strengthened 180-day liquidity buffer that considers outflows by reference to expected maturities, and amendments that require the issuer’s insolvency administrator to set aside funds for potential unsecured claims by covered bondholders.

“The EU’s directive on covered bonds requires member states to include minimum credit standards in their legal frameworks by 8 July,” said Luis Romaguera, an AVP analyst at Moody’s.

“The implementation of the directive will be credit positive, especially in member states that currently have frameworks with weaker features, such as Italy and Spain, or have chosen to exceed the requirements set by the directive, such as Germany.”

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